What is Due Diligence in Real Estate?

1. What is due diligence in property purchase?
2. Why is due diligence important in property?
3. How to do due diligence on a property

Performing due diligence before buying a house is one of the best ways you can safeguard your interests and money. Buying a house is one of the biggest investments you’ll make in your lifetime, so it’s essential you do your research before committing.

What is due diligence in property purchase?

Due diligence before buying your first home involves checking the physical and financial condition of the property and the area it’s located in. It’s typically done before you make an offer, and the contract is accepted. It could also involve things like looking at property value trends, building and pest inspections, checking for a caveat on the property, and so on.

Why is due diligence important in property?

Doing due diligence is important as it assists you in identifying any potential risks or issues that are associated with the property that could alter its value. Conducting thorough due diligence allows buyers to mitigate risks and protect their investment by ensuring they are fully aware of any hidden problems before finalizing the purchase.

Mitigates Risks and Protects Investment

Due diligence is a crucial step in any property transaction, as it helps uncover potential issues that could pose risks to your investment. These issues may include unregistered building works, termite infestations, structural defects, zoning violations, environmental hazards, or unresolved legal disputes. This allows you to make informed decisions, negotiate appropriate terms, and take necessary actions to address or mitigate the identified issues, ultimately safeguarding your investment and minimizing potential losses.

Ensures Informed Decision Making

Due diligence is essential in preventing overpayment in real estate transactions by providing valuable insights through market research and property valuation reports.

Market research allows buyers to gain a comprehensive understanding of the current market conditions, including recent sales data, trends, and comparable properties in the area. This information enables buyers to assess the fair market value of the property they are interested in and identify any discrepancies between the asking price and the property’s true worth. 

Property valuation reports conducted by professional appraisers provide an objective assessment of the property’s value based on factors such as its condition, location, amenities, and potential for appreciation.

Uncovers Hidden Issues

Due diligence plays a crucial role in uncovering hidden problems that could potentially derail a property purchase. Due diligence aims to unearth issues such as structural problems, environmental hazards, zoning restrictions, title defects, or outstanding liens. By identifying these hidden problems early in the process, buyers can make informed decisions about whether to proceed with the purchase, negotiate more favourable terms, or walk away from the deal altogether. In essence, due diligence serves as a vital safeguard against unforeseen obstacles that could jeopardize the success of the property transaction.

Provides Leverage During Negotiations

During negotiations in real estate transactions, due diligence findings such as structural defects can significantly impact the bargaining process. Buyers may leverage these findings to negotiate a lower purchase price, request repair credits or concessions, include contract contingencies for backing out or renegotiating terms, or extend the closing timeline to address the issues. In essence, such findings provide buyers with valuable leverage to secure more favourable terms in the transaction.

How to do due diligence on a property?

To do due diligence before buying a house, there are a few things you will need to check and ask. They include the following:

Research the market

Before you sign a contract, it’s important you understand how much the property is worth. Take a look at the properties that have recently sold in the area and compare them to the property you’re considering. This should give you a better idea of how much you should be offering.

Ensure the property aligns with the plan

You will find that there is a copy of the Land Title deed attached to the contract of sale. This is not always easy to read, especially if the property is part of a strata title.

You need to check whether the property you have inspected is the same property that is on the plan. To verify this, you need to obtain an identification survey. The surveyor will conduct the survey on the property and prepare a plan, which will contain the following:

Dimensions of the land;

Location of the property in relation to the other houses and cross streets; and

Confirmation that the building is properly sited on the land so that the council would not require any part of the building to be demolished.

Check the usage of the property

You must check whether you can use the property for your intended purpose. You can confirm this by either checking the zoning certificate, the Section 149 Certificate, in the contract for sale or by speaking to the town planning section at the local council.

Review what is included in the contract of sale

Usually, there are no doubts as to what is included in the contract for sale. However, in many instances, the buyer expects the property to be in a particular condition, which is different to what the seller is actually offering.

Sale of a property includes all fixtures, which are items attached to the property or are part of the structure. However, the purchase does not normally include anything removable, unless stipulated in the contract.

Consider the Strata Title

If you are buying a property such as a residential unit or a commercial unit in New South Wales, the property will be administered by the Owners Corporation, which is also known as a Body Corporate, in accordance with its obligations under the Strata Schemes Management Act 1996. You will be required to pay levies to the Owners Corporation to contribute to the management of the building and grounds.

You need to arrange to carry out a search of the books of the Owners Corporation to find out the levies you are required to pay, the present financial position and what amounts it may have set aside for future maintenance. The Minutes of the Council of the Owners Corporation also indicate whether there are any issues or problems with the building or any disputes among the existing owners. If you have any questions about this, you can always speak to our strata lawyer team.

Review home building insurance

Builder warranty insurance is always present in the contract of sale if any building work has been done in the previous 6 years, the value of which exceeds $12,000. In case a building agreement is in place, the seller must attach an Insurance Certificate to the house contract.

Before entering into the contract of sale, you should obtain details from the seller about the existing insurance cover for the property and the procedures available for the resolution of any dispute that may arise.

Conduct title searches

Checking if there are any encumbrances, easements or caveats on the property is incredibly important when you’re buying a property. Encumbrances, for example, can restrict the use of the land while a caveat can prevent the sale of a house. This type of due diligence is something your conveyancer will help you with.

Check sewer connections

Drainage or sewer plans are normally included in the contract of sale showing the location of any sewer mains and the connections from the building to the sewer.

If you have plans to carry out any extensions to the building that might get close to/go over the sewer, you may not get building approval or the building costs may increase substantially. As a property investor, this kind of property development due diligence can be crucial.

Book building and pest inspections

This type of buyer due diligence usually happens after you’ve signed the contract and have entered the cooling off period. Getting a building and pest inspection on the property you’re purchasing is critical because it gives you a clear picture of the state of the house.

Related blog posts:

• Should You Buy Or Renovate
• Should You Buy Property With A Friend, Partner Or Family Member?
• Asking All The Right Questions When Buying Your First Home

Talk to us about due diligence before buying a house

If you are planning to purchase a property, Owen Hodge can help you to carry out the appropriate due diligence checks and ensure your property transaction runs as smoothly as possible. Get in touch with our property lawyers or conveyancing team today.